Buy or Sell Real Estate at Auction? Things You Need to Know
You have probably seen a few, if not many, signs around town announcing that a property is to be auctioned on a particular date.
This has gotten our interest and we have done a little research to help everyone understand how property auctions are working here in
Northern California.
The popularity of the property auction was sparked by a show that plays on BBC America called ‘Homes Under the Hammer’ which is no longer being shown in the
U.S. In this show, people were at property auctions that gave them great bargains and the show then followed up on how the people made out with restoration. They brought in ‘Estate Agents’ (the same as real estate agents here) to give their market assessment on how the people did compared to buying property on the open market.
The majority of people who brought these properties had done very little compared to what they had expected to do over 3 months of followup. Often, the estate agents results were only as good or worse than what could have been achieved by purchasing a home in open market. Given the time and effort, most of the Buyers were worse off.
Here are some items that you should consider if you are thinking of entering the Real Estate Auction business space.
AS A SELLER
The property that you want to auction must be vacant and have clear title. In today’s market in the
US, only foreclosed homes have been put up to auction, as a rule. There are examples of successful auctions being completed on EBay. There is a cost for doing the auction. EBay will charge almost $6,000 to sell a home (for a $350,000 property as an example) on their site and the fee will have to be paid within 30 days of the close of the auction. Most properties in escrow take at least that long, so you will probably have to come up with the fee out of pocket.
You can hire a firm to auction your property. The company will have you sign a contract with them to do the promotion, advertising, setup and operation of the auction. You will have to pay the auctioneer, whether the property sells or not. You will be able to place a reserve price on the property (a reserve price is one where the minimum selling price is set and the sale does not occur if the reserve is not met) but more than likely, the selling price is reviewed by you, including the terms of the sale (any commissions asked, repairs, loan terms, etc.). You can then decide as to whether you accept the deal or not. In either case, you will be required to pay the auctioneer.
If you decide to use an auctioneer, you should interview several to determine whether they have the resources to conduct an auction that will attract the largest number of bidders. New real estate auction firms are popping up all of the time, many of which have no real estate auction experience (as in the U.S., we have not done a lot of this in the past). Be wary of the statements made. Auctioneers are salespeople just like Real Estate agents.
AS A BUYER
Looking at the auction ads you will see some very low prices advertised. These prices are the starting bids for the properties and this advertising is used to entice you to attend the auction. If you are attracted by this, you are not the only one who is. The prices do attract a large number of potential buyers.
The preview weekend (sometimes weekdays) is important as this will be the only time that you have a ‘Get out of Contract Free” card. If you are the successful bidder on any of these properties, you are obligated to purchase them, regardless of condition. Bring your pest specialist, home inspector, or any other trades person to look over these properties. While some may be in good condition, many are not. You need this information in order to make a sensible bid. For example, if the property is worth $300,000 but has $20,000 worth of pest damage, it is worth less, at least $20,000 less.
Get your loan in order prior to going to the auction. You will have to know if you can get a loan unless you are prepared to pay all cash for your new acquisition. There may be a lender at the auction site, but not always. Remember, you will be entering into a contract to purchase. If you win a property, you will more than likely be required to place a 5% deposit on the property prior to leaving. For a $500,000 home, this means a $25,000 check. Most firms will take a personal check for this, but many do not.
Most of the time, the auction sales contract will specify that you must close escrow within 30 days. If you do not, there will be per diem penalties that will increase the cost of your purchase.
Here is the most important part of purchasing real estate. If you change your mind about purchasing the property, you will more than likely lose your deposit. This is the major difference between the regular sale and the auction sale. Be very, very aware of this.
The property, once you win the auction, may note be yours. The Seller will have a few days to review the result and determine whether or not to accept it. We get listings frequently from asset managers who have placed the property on auction and not received the amount they expected. Don’t think the bargain that you get at the auction is necessarily a done deal. The asset manager will determine if your bid is sufficient. It is different than a regular auction of collectibles, kitchen equipment or estates.
You will probably find at auction that choice properties will attract more Buyers thus driving up the price. That $150,000 starting bid goes fast more the $500,000 property and is bid to the level that this small market will take it. Be prepared to raise your paddle quickly and to take it down even more quickly once your price is hit.
CONCLUSION
There are people who have experience, time, and money that will help in making money from auctioned real estate. You will be competing with them. Be aware when entering into this arena. It is always a good idea to take an experience real estate professional with you when trying this. Good one will not charge you for this service as they will be compensated from the seller. Good luck!
If you have any questions about this, give use a call at (925) 308-7045
John and Diana Case
Broker Associate/Realtor, CRS, GRI, SRES
Intero Real Estate Services – Delta Communities
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